Critics on Richard Olsen

Smart as it is, there are times when the approach of Olsen and his colleagues has failed to work. Like other more simple data mining and historically based methods, it works in periods when currency movements are following a trend but gets whipsawed with penaliz-ing transaction costs in trendless markets. And during a change in the trend, O&A might identify a turn but not know the difference between a minor and a major turn.

Yet this group comes closer to modeling how the foreign exchange world really works than others. When there are new academic insights, they are likely to note them early.

A broader social counterpoint to today's forex markets is that with this daily volume of electronic, invisible money flowing throughout the world, a single nimble trader can drive a monetary institution to the wall. A trader is often compensated by a share of the trading profit, which can put tens of millions into his or her pocket. The trading institution takes the risk and the trader takes the profit: a true asymmetrical payoff scheme operates to pyramid risks. A central bank seeking to dampen its currency swings may come forward with a few billion but this is typically something that a single trader could command. In these circumstances, a central bank attempting to influence a currency is like sending a bicycle onto a superhighway.

The size of forex trade has played its part in the series of currency crises in emerging nations during the 1990s. The capacity for massive daily foreign currency flows to take place made possible the almost overnight collapses of the currencies of Thailand, Indonesia and Russia in 1997-8. As confidence in the economies of these countries fell away, demand for their currencies dried up as investors took their capital out or stopped bringing it in. Governments had tried to buy their own currencies to underpin their value but could not keep up with the sellers. When they stopped their own forex activity, the forces of demand and supply saw the baht, rupiah and ruble in turn crash in value, deepening the crisis of confidence and economic slowdown.

Some commentators are now recommending a tax on forex dealings: for example, Nobel Laureate James Tobin has warned that free capital markets with flexible exchange rates encourage short-term speculation that can have a ''devastating impact on specific industries and whole economies." To avoid this real economic havoc, he advocates a 0.5% tax on all foreign exchange transactions in order to deter speculators, a remedy dubbed the Tobin tax.

There are three rationales for the proposed Tobin tax: the first is that the volume of foreign exchange transactions is excessive fifty to a hundred times greater than that required to finance international trade; the second is related to the first reducing volatility offers more independence to national economic policy-makers; and the third is simply the tax-raising abilities of such a tax, which is linked with the view that the financial sector is relatively undertaxed.